The Birth of an 'Odious' Law

Why you should care

Perhaps understanding the origin of the income tax will ease the pain of filing this year.

By Steven Butler

The Daily DoseFEB 26 2015

It was a grave turning point in American history. Call it the 1 percent moment: 1 percent of the population owning a full 47 percent of the nation’s wealth, and raking in 15 percent of national income, yet paying no taxes. NO TAXES. We’re talking about the global Occupy Wall Street movement, yes? Actually, no.

This was the distribution of wealth and income at the turn of the 20th century, a source of outrage that led inexorably to one of the most enduring and hated laws of the federal government: the progressive income tax. It may be the most powerful tool ever invented for a government to reach into the pockets of its citizens to extract wealth. And it was 50 years in the making, at least, before a constitutional amendment — the 16th — was ratified by the required three-quarters of the states in 1913, finally authorizing the tax.

The power of an income tax had long been appreciated, if not the justice of it. Abraham Lincoln turned to it in near desperation when the Union was going bankrupt as it pursued war against the secessionist South. “It will be odious, of course,” declared Sen. William Pitt Fessenden of Maine, as he pushed the bill through the Senate in 1862. For this tax, thank the Republicans. The tax was possibly unconstitutional at the time, but, hey, it was wartime. Until that point, the federal government had relied on tariffs to fund its operations, tariffs that shielded growing industries from foreign competition. They were especially popular among the industrial states of the Northeast, but hated by agricultural states, including in the South, and by the poor.

A hundred years later, the debates of the day have a surprisingly familiar ring to them.

Tariffs were regressive, sharply pushing up the prices of daily goods — everything from shoes to pots and pans — and placing a far greater burden on the poor. The rich paid too, of course, but they were free to accumulate wealth virtually tax-free. At issue was a fundamental moral principle, explains Steven Weisman, author of The Great Tax Wars. It’s the enduring conflict between the idea that citizens should pay according to their ability, with the rich shouldering the greatest burden, versus the notion that hardworking and successful risk-takers should be allowed to keep the fruits of their success.

Starting with the huge revenue needs of World War I, the income tax became an abiding feature of American life.

Source Landov

After the Civil War, the tax expired, only to be revived again about 20 years later, after an 1891 census showed that a tiny handful of families owned over half of the nation’s wealth. A tax on the income of the rich, reasoned Missouri Democrat Uriel Hall, would placate the poor, and be a “measure to kill anarchy and keep down socialists.” By 1894, the tide had shifted. After a ringing debate — New York Sen. David Bennett Hill called the tax the product of “little squads of anarchist, communists and socialists” — the odious tax passed, only to be overturned by the Supreme Court a year later.

By the turn of the 20th century, with Theodore Roosevelt in the White House, the progressive movement continued to gain sway. It was more than just farmers and factory workers. “Liberal reforms became part of a middle-class agenda around the turn of the century,” says Weisman. By that time, many of the states had already enacted their own progressive income taxes, unconstrained by the federal constitution. In 1909, income-tax opponent Rhode Island Sen. Nelson Aldrich proposed a constitutional amendment for the tax, reasoning that the idea would die when states failed to approve it. Wrong he was, as the mood of the country continued to shift in favor of taxing the rich. And starting with the huge revenue needs of World War I, the income tax became an abiding feature of American life.

A hundred years later, the debates of the day have a surprisingly familiar ring to them. The concentration of income and wealth once again resembles Gilded Age extremes, writes Thomas Piketty, in his bestselling book Capital in the Twenty-First Century. And progressives are swinging into action again. “Millions of our fellow citizens across the broad middle class feel as if the American Dream is now out of their reach … that the playing field is no longer fair or level.” Oops. That came from the website of a political action committee formed by Republican Jeb Bush. The great debate will not end.